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Stock Analyst Update

Microsoft Continues to Impress; FVE Up to $345

Quarterly strength and good guidance drive our fair value estimate to $345 from $325 per share and we continue to see upside to this high-quality name.

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Wide-moat Microsoft (MSFT) continues to benefit from digital transformation efforts at enterprise customers, which once again helped the company drive material upside compared with its revenue and EPS outlook for the quarter. Second-quarter guidance was solidly above FactSet consensus as well. Azure and commercial related demand was robust by any measure, and gaming and Windows were strong even as supply constraints for PCs and Surface tablets remain challenging. We see a slowdown in remaining performance obligation, or RPO, growth and commercial bookings, two forward-looking metrics, as driven by large Azure deals in the prior year period and not a reflection of deteriorating demand. Microsoft remains impressive in its ability to drive both growth and margins at scale and think there is more to come on both fronts. We see results as reinforcing our thesis centering on the proliferation of hybrid cloud environments and Azure as the firm continues to use its on-premises dominance to allow customers to move to the cloud easily and at their own pace--a trend we believe will continue over the next five years. Quarterly strength and good guidance drive our fair value estimate to $345 from $325 per share and we continue to see upside to this high-quality name.

For the second quarter, revenue growth accelerated by 22% year over year to $45.32 billion, compared with our model at $44.17 billion and FactSet consensus at $43.86 billion. Relative to our expectations and the high end of guidance, all segments were ahead with more personal computing driving the most upside. Key pillars of our growth narrative from the quarter included year-over-year growth in Azure of 50%, Dynamics 365 of 48%, PowerBI apps of 202%, Office commercial of 18%, and LinkedIn of 42%. Channel constraints drove Surface revenues down 17% compared with the year-ago period. Xbox demand remains strong although supply chain issues continue to crimp demand, which we expect to continue over the next four quarters.

 

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Dan Romanoff does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.